Manufacturing: Heart of the economy or just a sacred cow?

LONG READ: Britain will never be the workshop of the world again, but manufacturing could help solve our productivity problem.

by Andrew Saunders

Published: 12 Oct 2016

Last Updated: 20 Oct 2016

What's so special about manufacturing? Hardly a month goes by without calls from one quarter or another to rebalance the UK economy away from services and back to the 'good old days' of the 1970s when manufacturers accounted for over 25% of UK GDP. Britain was the 'workshop of the world' and prosperity poured forth in the shape of export-earning artefacts - everything from ships to steel girders, cars to chemicals - from busy factories up and down the country.

Despite (or perhaps because of) the fact that we live in an increasingly friction-free virtual world where the smartphone rather than the white-hot crucible is now the starting point for growth, it's become axiomatic for many that making more stuff is the miracle cure for the UK's economic ills. When everybody from the CBI to Jeremy Corbyn is calling for the same thing, surely there's got to be something in it?

And as the country faces up to the unprecedented challenges that Brexit - hard, soft or otherwise - will bring, the question of just how much manufacturing is enough has once again risen up the economic agenda.

Is there a simple answer to that question, and why - when service industries are a quick, cheap and seemingly effective alternative source of GDP and employment - is the physical act of making still held up as the gold standard of economic activity?

'Is manufacturing special? No, the headline conclusion is that the idea that manufacturing is somehow sacred is not true,' says Erik Britton, director of Fathom Consulting and former macroeconomist at the Bank of England.

For Britton, a pound of GDP is a pound of GDP and whether it comes from bashing metal or bashed bankers, from striving techies or striving foreign students dutifully paying their tuition fees, is immaterial.

A return to the good old days? Credit: Getty Images.

The debate over manufacturing is as much political as economic, he says, and dates back, like so much in this country, to that fateful General Election way back in 1979. 'Manufacturing was killed off deliberately back in the 80s with 20% interest rates and extremely tight fiscal policy, to tackle what was seen at the time as our worst economic problem - labour relations. The question posed then was: "Who runs the country, the government or the unions?" - and Mrs Thatcher was elected to make sure that it was the government.'

The key issue is not so much manufacturing vs services as productive vs unproductive activity. 'What is special is innovation. There is a broad consensus among economists - itself a very rare thing - that the benefits of innovation to the rest of the economy are large and positive,' says Britton.

Innovation feeds into productivity, and it is productivity rather than manufacturing per se that is the key to prosperity. And while the UK may have many economic strengths, productivity is not one of them - our output per hour worked is 38% lower than the US and 36% lower than Germany, and of the remaining G7 countries we outperform only Italy.

Manufacturers don't have a monopoly on innovation, of course - there are lots of service innovations too, from iTunes to JustEat. But, he reckons, manufacturing innovations tend to be less sector specific and more widely applicable. 'Take carbon fibre for example. It started out in aerospace to make wings lighter, now it has thousands of uses, there are even carbon fibre bikes. We should be looking for high-tech, high-innovation sectors where we can be globally competitive, whether manufacturing or services.'

Sectors like pharmaceuticals, aerospace and the automotive sector are Britton's idea of 'good manufacturing'. The rust belt industries of old are not. 'There is no merit in returning to the days of making steel and building ships in the UK, they are not highly productive or innovative industries.'

But he does concede that putting too many of the nation's economic eggs in one basket is unwise, and that from this perspective at least a shift away from services (now accounting for 78% of GDP) and towards manufacturing (around 10% of GDP) would be a good idea.

'A more balanced approach is sensible - where are the large areas of social returns that you are missing? The smartest kids want to trade bonds - that is unbelievable! What are you contributing to society? Nothing. Literally and figuratively, we've got to get our hands dirty.'

There's manufacturing and then there's manufacturing

One of the trickier accusations levelled at those calling for more manufacturing is that they often appear to be acting out of nostalgia, fighting parochial old battles rather than engaging in the new global ones.

So when the government is exhorted to dip its hand deep into its pockets to save, for example, the 4,000 jobs at Tata's Port Talbot steelworks in South Wales (or its pension scheme at least, to encourage prospective buyers), is this sound 21st-century industrial policy or a rose-tinted but ultimately futile hankering for days gone by?

'Manufacturing is important, and let's hope much of it is in Britain - it's associated with big GDP contributions, job creation and exports, all good things. But for me it's not so much about where things are made, but about being competitive on the world stage and allowing our brilliance in design and creativity to shine through,' says Martin McCourt, chairman of domestic appliance group Glen Dimplex and former CEO of bagless vacuum pioneer Dyson.

'I'm not a purist - if buyers in Japan, China or Australia see a British brand name on an item, it matters less and less to them where it is actually made. That's not so important for the future of the economy than it has been in the past. My drumbeat is always that we should figure out where the best place to make things is - the place where you can make the best product at the lowest price with the right quality.'

If that's just down the road from a British HQ, all well and good - and even if it costs a bit more to do that it may be worth it for convenience. But it might equally turn out to be Ireland, Eastern Europe or Asia.

'Steel is a good recent example - if we can make a fist of it then good, but if we can't then what is the point of labouring over something that because of the economic conditions we cannot be competitive in?' he says.

This is essentially David Ricardo's theory of comparative advantage which dates back to the early 19th century and the birth of the Industrial Revolution. Crudely summarised it says 'specialise in what you are good at and buy the rest from someone else', and it has been one of the guiding tenets of generations of industrial development.

This argument goes to the heart of the manufacturing debate, but the trouble with Ricardo's theory is that it ignores the fact that advantages can be gained as well as lost, and that what look like low-value commodities ripe for 'someone else' to do, can sometimes be turned into highvalue products with a bit of clever thinking and technology.

'Steel is not just steel,' says David Landsman, executive director of Tata Ltd and head of the giant Indian conglomerate's European operations. 'There are construction steels which generate energy, or reduce the carbon footprint. Tata Steel reports always talk about how many new products have been brought on stream.

'The high-value model is right but you can create value in a range of sectors. There is a future for UK manufacturing and it's precisely because it has changed from those old days. It's not about oily rage any more, it's about digital and tech.'

Tata's operations in the UK embrace not only the troubled steel business but also Tetley Tea and JLR, the poster child for the reborn, globally owned UK car business - a sector which employs 800,000 and turned over £69.5bn last year.

Landsman also points out that even making the distinction between manufacturing and service industries is increasingly redundant, as the line between the two is becoming blurred by a process going by the unlovely term 'servicisation'. 'Things that used to be sold as products are increasingly sold as services - you buy the use of the thing rather than the thing itself.'

So customers for Rolls-Royce's aero engines, for example, now sign up for 'Power by the hour' - a pay-as-you-go model which includes servicing - rather than shelling out for the engines (the product) and maintenance (the service) separately. And whereas buying their own wheels has been a no-brainer for car-mad Brits for decades, there are now numerous service-based alternatives, from car clubs like Zipcar to ride-hailing apps like the all-conquering Uber. 'We have a substantial R&D department and endow university chairs, there's lot of innovation going on,' he says.

The Tata story is a textbook example of the kind of foreign direct investment which has kept UK manufacturing alive in recent years. Fears that Brexit may now lead to a turning off of some of the FDI taps need to be addressed, says Glen Dimplex's McCourt. 'Our openness has been a big strength. If you are a wealthy investor or development capital company then the UK is a good place to bring your money. We need to continue to attract that and hopefully that will be top of the list for the new cabinet.'

The human element

So much for the economics, but there is another aspect of manufacturing that plays a part in its special status - the nature and quality of the work involved. In comparison to the fragmented world of the gig economy, or job in a call centre or fast food joint, the manufacturing journey - from idea to design, then production, and then the finished article - somehow seems more human and psychologically complete.

'I've grown up looking round factories with my dad, I love the creativity of it and the fact that there's a tangible product. For me that's much more satisfying than financial services,' says Cassie Hutchings, chief executive of GCH Capital and one of MT's 35 Women under 35 for 2016. (Incidentally the dad in question is none other than Greg Hutchings, the maverick former boss of the Tomkins engineering empire, now owned by a Canadian private equity consortium.)

GCH owns eight manufacturing businesses whose products range from LED lighting and automotive parts to steel plate and wooden agricultural storage boxes. 'When you go round our sites, the people you meet, the processes involved and the products they make, it's mind-boggling.'

Hutchings - who took a degree in psychology before realising that she 'likes a solution, and I was never going to be able to "solve" people' - says that not everyone wants to push photons around the internet for a living, and that a sense of collective endeavour and being a part of a greater whole can be a powerful thing. 'People want to know how what they do makes a difference, to have something to show for their day's work at the end of it.'

But she is far from blind to the economic imperative, and would like a bit more thought and energy directed at manufacturing from the corridors of power.

'I love manufacturing and have a real passion for it. I'd like to see a bit more of that kind of enthusiasm reflected back from government.'

The future of manufacturing? Credit: Getty Images

The omens aren't too good on that front - politicians may talk a good game but they don't follow through - take recent changes in capital allowances, she says. 'We've just spent £700,000 on a profiling machine in one of our businesses. Capital investment adds value, but the changes in allowances have made that investment more expensive.

'We do need to rebalance because we are so reliant on financial services now. Manufacturing provides medium-and high-skilled jobs to pay for public services - the NHS and education.'

But the flipside to the rise of such tech, says Rich Walker, managing director of Shadow Robot Company, is that barriers to entry are falling too. 'It's becoming much cheaper and quicker to get a manufacturing start-up off the ground,' says Walker, whose business is making sophisticated robot hands, which much more closely mimic the action and deftness of a human hand than existing clumsy claws.

'There is always room for more high-tech manufacturing in the UK - as a manufacturer you benefit from being close to your users and suppliers. It might cost three times more to have something made by a guy in Essex than someone in China, but if you need it in three days then it's worth it.'

So after all that, is UK manufacturing special? Well, yes and no. It's not the panacea that some boosters proclaim, but it certainly has an important part to play in a balanced economic diet. 'We're strong in consumer products, automotive, pharmaceuticals - we suffer a bit in commodities but it's more than compensated for by the broad spread elsewhere,' says McCourt. 'We have great diversity and lots of levers to pull. I'm an optimist, there are many worse places to be than here.'